Global Housing Watch

The International Monetary Fund has launched ‘Global Housing Watch’. This new programme aims to end what it calls an era of ‘benign neglect’ over the effects of housing booms.

It is an effort to curb complacency among policy makers and regulators who, the IMF says, have not considered enough the downside of high house prices. While rising house prices can have a positive effect on economic growth, when they start to fall the effects can be extremely negative.

Increased house construction and increased consumer spending are all ‘feel good’ factors that governments like. But, as the US has been discovering since the bubble burst in 2008, the negative consequences of housing bubbles can be disastrous.

House Hotspots

The IMF are attempting to bring some data and insights into this volatile area, and have compared house prices along with rents, average incomes and many other data streams from many countries.

The headline over the last year is that in the 51 countries measured, house prices rose in 33 of those countries.

Relative to long-term figures, including rents and incomes, some countries continue to post well above average house price growths. The IMF sees this as cause for concern. The countries involved are: Australia, Belgium, Canada, France, New Zealand, Norway and the United Kingdom.

At the other end of the scale, countries that seem undervalued on all the metrics include: German, Japan, Portugal and Slovakia.

High House Prices – Banking Crises

One statistic that shows why house price bubbles are so important and have such far-reaching consequences was highlighted by Min Zhu, IMF Deputy Managing Director. In a post on the IMF website, he says:

‘Our research indicates that boom-bust patterns in house prices preceded more than two-thirds of the recent 50 systemic banking crises.’

But acknowledging the problem is the first step. What solutions can regulators and administrations use to dampen the boom-bust bubbles? At a strategic level, as Mr Zhu points out, ‘the policy toolkit to manage housing cycles is still under construction’.

However, responses, according to economist Avinash Dixit, should be broken down into three areas: microprudential, macroprudential and monetary policy.

Microprudential

Microprudential is aimed at ensuring the resilience of individual financial institutions. While this may sometimes work, clearly focusing on one particular institution can create imbalances across the system as a whole.

Macroprudential

Macroprudential casts the net wider and aims at ensuring the stability of the system as a whole. This would involve using such financial instruments as caps on loan-to-value or debt-to-income ratios. Hong Kong has been doing this since the 1990s, and Korea since the beginning of the century.

Monetary Policy

These systems do seem to work at least in the short term, but the central banks raising interest rates is an example of monetary policy aimed at cooling an overheating market. It is clear that monetary policy needs to be more concerned than it has been with financial stability – and a stable housing market forms an important part of a nation’s financial stability.

George Carney, Governor of the Bank of England, recently said:

‘The biggest risk to financial stability, and therefore the durability of the expansion, those risks centre in the housing market and that’s why we are focused on that.’

He also pointed out one fact that cuts across all those policies – that not enough houses are being built.

Mr Zhu of the IMF acknowledges that the instruments and their effectiveness are still being analysed, but more does need to be done, possibly using a combination of policies to achieve stability.

As Mr Zhu says: ‘We need to move from “benign neglect” to an “all of the above” approach when it comes to policy choices.’

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